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The Top 3 Reasons You Should Adopt an Envelope Budget

I’d love to purchase that nice gift for a friend, but can I afford it?

I want to start saving money for that new car but where do I start?

If you said yes to any or all of the above then adopting an envelope budget might be for you.

Many of us hear the word budget and we groan. Literally. It sets boundaries for us that we don’t like. Personally, when I think of the word budget it feels like someone’s just tied my legs together and fired a gun in my ear for a race.

Yes. It’s that intense.

But, thankfully that analogy is far from the truth.

The technique of using an envelope budget gives you the clearest picture of how much money you’ve set aside for that spending category and gives you a rolling balance throughout the month to see where you’re at. Simply put, if the money is gone from that particular envelope, you’re done spending OR you need to take from another area to compensate. Sound simple? It is!

Here’s why:

1. An envelope budget is a transparent way to see exactly where your dollars are going each month.

Imagine standing in line at the grocery store with a cart full of groceries and the cashier just announces that you owe her $360. You just got paid and it’s the 1 of the month. If your allotment for groceries is only $400 for the next 4 weeks there’s a fair chance you’ll be eating Ramen by the last half of the month. An envelope budget will give you high visibility of those extravagant purchases.

Unless…

2. An envelope budget allows you to see where you need to spend more dollars.

It’s possible that the above scenario speaks true of how many groceries you need in a month. If you find that your family eats $700 in food and you are only trying to spend $400, the envelope budget will make this evident to you. Perhaps you are setting aside $150 a month for gifts and, at the end of 6 months, you realize that you have $875 left in your gift envelope but you’re eating beans and rice for dinner.

That example might seem a little extreme, but it gives you a visual of exactly where your budget can be adjusted. It would then be obvious that you need to increase your grocery budget and decrease your gift-giving budget.

3. An envelope budget reigns in your debt ratio, keeping it to a bare minimum.

I’ll be the first to admit, there is nothing easier than whipping out a credit card to pay for an item. It’s lightweight. It’s fast. And it’s…completely invisible until the statement shows up in my mailbox 30 days later.

Credit cards are no doubt an easy way to pay for things, but unless you’re an elephant (or logging each transaction as you go) you will only remember a small hand full of these purchases. This is how credit card debt is so easily accumulated. If your spending far exceeds your payroll, the price of these purchases will pile up month after month, until your debt ratio is so high that there’s no light at the end of the tunnel for paying it off.

Using the envelope budget system will allow you to buy only what you’ve designated that you can afford. It will keep your impulse spending in check so that each time you feel the need to buy something, a quick glance at your envelope’s remaining balance might be reason enough to find you don’t need it after all.

Now that you’re feeling excited, it’s fair to say that adopting an envelope budget does take a little bit of getting used to. As we could see from the first two examples, it takes some time to tweak your spending in each category. However, you’ll experience very little loss in return for the gain you will see in the long run.

And, besides, what’s a few months of adjusting compared to all those previous years of overspending?